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Lessons from 10 years of FinTech in Africa

July 9, 2018

The last 10 years FinTech businesses bridged the African challenge in which high percentages of populations went unbanked. But FinTech innovations cause side effects, as data protection, registration, regulation and creditworthiness still lack.

Africa's FinTech ecosystem started twelve years ago, when Vodafone launched mobile money platform M-Pesa for Vodacom and Safaricom in Kenya. M-Pesa converted into a people-to-people payments platform, with which Kenyans were able to send and receive money. M-Pesa successfully filled the gap of lacking bank branches and now operates as a money-transfer and (micro)financing service. Each day, M-Pesa processes more than EUR130 million.

Revolutionizing financial transactions

M-Pesa revolutionized financial transactions, both for individuals as for SME's. Its success led to the rise of numerous other FinTech start-ups building their business in African countries, focussing merely on providing micro financing and loans, with the collective goal to financially include the next 1,7 billion people who have no access to financial services.

Today, M-Pesa is one of the many financial innovations and products that are flooding the African markets. While the opportunities for both investors, investees, FinTech businesses and entrepreneurs have increased, so have the risks around digital financial services. An example is the rapid growth of digital lending products, some of which carry risks of overpricing and over-lending to customers. Especially high interest rates are causing problems to borrowers who often have zero equity and are uninsured against sudden changes in their lifestyles.

Lack of framework

Another factor that is holding back investors in inclusive digital financial services is the lack of a framework to help them evaluate risks. Microfinance borrowers also sometimes borrow from multiple financial institutions as well as informal lenders with aggressive enforcement mechanisms at their disposal. Micro finance institutions need to factor in these risks when granting credit to such borrowers.

FinTech reaches the financial excluded, but is lacking the capability of verifying borrowers' cash flow and creditworthiness. "FinTech solutions skim off the easier-to-reach customers, people we don't know much about and who are often low-educated and illiterate", says Laura Foose, working with the Social Performance Task Force that promotes standards and good practice in financial services. "FinTech is 10 years old", she says "We shouldn't be making the same mistake we made 10 years ago and show responsibility."

Getting crowded

A new agenda for the next ten years: We need standardization and a critical look at what we do

According to Hans Docter, director for Sustainable Development at the Dutch Ministry of Foreign Affairs, the problem with micro loans also lies in the fact that the fintech space in Africa 'is getting over crowded'. "There is more and more overlap in activities, that are also over-subsidized. As it is too early for high level regulation, the sector itself should invest in options to regulate and coordinate", he says. "The possibilities to financially include the next 1,7 billion people are rising, but the loss of data, data leaks and breaches and misuse call for a new agenda for the next ten years: We need standardization and a critical look at what we do."

Relate to customers

M-Pesa pioneer Michael Joseph states that investors must be able to relate to customers and end-users. "We've got to invest in changing lives, otherwise, why bother." Mr Joseph is the founder of telecom operators Safaricom and Vodacom and was an early investor of M-Pesa, the platform he helped building. "There's a lot to do in the mobile money and FinTech industry in Africa. 'How can we make money' has proven once again to be the wrong approach."

There's a lot to do in the mobile money and FinTech industry in Africa. 'How can we make money' has proven once again to be the wrong approach

Recognizing this, over 40 leading organizations, including FMO, have joined up to develop a set of guidelines for investors who are interested in funding inclusive digital financial services in a responsible way. How these organizations define and handle the issues facing the FinTech industry will enable the investor community to better identify new opportunities and manage investment risks. These guidelines were signed on June 20th.